The management of Fannin Corporation is considering dropping product H58S. Data from the company's accounting system, appear below: Sales $ 950,000 Variable expenses $ 380,000 Fixed manufacturing expenses $ 362,000 Fixed selling and administrative expenses $ 242,000 In the company's accounting system, all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $217,000 of the fixed manufacturing expenses and $178,000 of the fixed selling and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the company's overall net operating income if product H58S were dropped

Net operating profit will decrease by $175,000 if product H58S is dropped.

Explanation:

Sales $950,000

Variable expenses $380,000

Fixed manufacturing expenses $362,000

Fixed selling and administrative expenses $242,000

net loss -$34,000

non-avoidable manufacturing expenses = $362,000 - $217,000 = $145,000

non-avoidable S&A expenses = $242,000 - $178,000 = $64,000

total non-avoidable expenses = $209,000

Net operating profit will decrease by $209,000 - $34,000 = $175,000 if product H58S is dropped.  Non-avoidable expenses will have to be allocated to other product lines, therefore, they will reduce the company's operating profit even if this product line is dropped.

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